"2. At the top of page 4 of your testimony you indicate that requiring a developer to register with the SEC may result in his furnishing "unnecessary and confidential information to the competitors of the developer." I would appreciate it if you could give me examples of the kind of information that would be required under S-275 which would be so confidential as to create a competitive disadvantage for the developer making the disclosure."

To require a developer to furnish as a matter of public record, its sources and methods of financing, particularly at a time when there exists a tight money market, could give less fortunate competitors an extreme advantage in determining new potential sources and methods of securing capital. In addition, no one knows, under the wording of the present bill, what rules and regulations the SEC would require; but, unquestionably there would be some form of rules and regulations which could be much broader than the Congress anticipated and which could create an additional unfair competitive situation.

"3. Also on page 4 you suggest that many states now have laws which adequately protect the purchaser from developers who are not financially responsible and solvent. Would you please indicate the states to which you are referring."

The statement made in my testimony followed the testimony of Mr. Cohen of the SEC. At that time he stated "A few of the states, such as California and Minnesota, have had considerable experience in developing disclosure materials with respect to subdivision lots and we may draw upon that experience.

"4. In the second full paragraph of page 4 you suggest that the regulation proposed by S-275 will work an undue hardship on the developer. Inasmuch as registration is also required for the offering of securities could you comment on whether there will be any greater hardship in real estate sales than there is in security sales."

(a) As a partial answer to this question, I respectfully refer you to my answer to your question No. 2.

(b) Mr. Cohen of the SEC recognized in his statement before the Committee that there is a marked difference between the sale of securities and the sale of real estate. In the sale of securities the purchaser is buying an intangible asset. He has no means of discovering the value unless accurate information is furnished him. Land is tangible property and in purchasing land the purchaser may view it and assess its value.

(c) If a prospective purchaser desires to purchase securities, for example, General Motors Corporation, that purchaser is, and should be, entitled to complete information concerning that corporation. If, on the other hand, a purchaser desires to purchase a GM product, he should be concerned only with receiving clear title to that product. The same should apply to a developer of real estate. A purchaser of securities offered by a developer should be entitled to complete financial disclosure. A purchaser of the product of that developer, namely land, should be concerned only with receiving clear title to that product. If the purchaser has had an on-site inspection and has received full disclosure of title, as suggested in the answer to question No. 1, this should be his only concern. To require more is to place an undue hardship on the developer which to my knowledge has not been placed on the seller of any other product.

"6. On pages 4 and 5 you discussed the various difficulties which you feel may be encountered because of the 48 hour requirement:

a. Isn't it correct that S-275 only states that contract will not be binding until 48 hours after the purchaser has received the prospectus?

b. Isn't it true that under this statute a person may execute a contract at any time and that if he is satisfied with the deal he simply does nothing about it and 48 hours after receipt of the prospectus it takes affect?

c. Is there something about the sale of land which makes it less desirable if a person has an opportunity to think about the wisdom of his prospective purchase?"

(a) It is my interpretation (paragraph 4(b) of S. 275) that the developer is even prevented from offering for sale any property until at least 48 hours has passed after the purchaser has been furnished a prospectus. Certainly no contract could be signed without an offer for sale.

(b) No, for the reason set forth in paragraph (a) above. I do not interpret the bill to permit the execution of a contract and any attempt to do so would be an offer to sell. A major objection to this clause is that a purchaser may enter into a binding contract in which all the provisions of the bill have been met and then several years later claim that this 48 hour provision was violated

when the contract was made. It would then be difficult to establish that the sale was valid.

(c) No more so than in the sale of an automobile or other property. Since the delay period is not required in such sales, it should not be required in the sale of land, particularly, where the purchaser has made an on-site inspection and has been furnished with the pertinent data concerning title.

"7. In light of the evidence that untold numbers of older retired persons have purchased sight unseen, which may be of little or no real value to them, are you suggesting that there is no need for effective protection of their interests?"

Absolutely not. I feel that elderly people along with all other potential purchasers of real estate should be protected from fraudulent land sales. However, legitimate and honest real estate developers should not be unduly hindered; and it is for this reason that I have suggested an exemption for developers when an on-site inspection of the property has been made, a written statement as to title has been provided, and an affidavit to that effect is a part of the contract of sale. If this is done, any purchaser has a complete and full remedy at law if the situation has been misrepresented to him.

"8. On page 8 of your testimony you suggest that there are less and less problems with interstate land sales. I would appreciate knowing on what information you base this judgment."

I based my statement partially on the statement of Senator Williams as quoted in my testimony to the effect that the real estate industry "has already accomplished fine results in many parts of the nation? and that "thousands of retired persons are now living in well planned communities built on once marginal land or on lots deep in the desert and even on land that was once jungle or swamp." I assumed that Senator Williams had discovered this in his research concerning his bill. I also had in mind the continuing improvement of state laws in this regard.

I also enclose copy of my letter to Senator Williams as Chairman of the Subcommittee including certain suggested amendments, a copy of which amendments I also enclose with this letter. It is my hope that my answers to the questions submitted herein and the suggested amendments will be made a part of the hearing record, and I am enclosing an additional copy of my letter for your convenience in inserting the same in the record.

Please let me know if you desire my further information, and I will be happy to attempt to supply you with such information. I shall appreciate your giving consideration to the adoption of my suggested amendments.

Very respectfully yours,

HERNDON P. JEFFREYS, Jr.

APRIL 6, 1967.

Mr. HERNDON P. JEFFREYS, Jr.,
Attorney at Law,

Richmond, Va.

DEAR MR. JEFFREYS: Thank you very much for your letter of March 28th and the attached documents. I appreciate receiving your replies to the answers which I propounded in my letter of March 15th. There are several questions and comments which occur to me based on your answers to these questions.

A. I am afraid I must disagree with your interpretation of Section 4(b) of S. 275, as expressed in your answer to question 6. I do not believe that 4(b) requires a seller to furnish the prospectus to a potential buyer before offering to sell the particular property in question. Rather, this section requires that if a contract for sale or lease is negotiated and executed, such contract would not be binding upon the purchaser unless the purchaser has received this prospectus at least 48 hours before the agreement is binding upon him.

I find it hard to understand why this 48 hour provision would make it difficult to establish the validity of a sale some years later as you indicate in part b of your answer to question 6. It seems to me that the seller could easily make a notation as part of the contract which would expressly state when the prospectus was received by the purchaser. If this contract was signed by the purchaser, it seems to me that he would be hard pressed at some later date to deny his receipt of the prospectus as required by the statute. Again I want to thank you for responding to my inquiries.

Sincerely,

WALTER F. MONDALE.

Senator WILLIAMS. John C. Williamson is our next witness.
We welcome you back.

STATEMENT OF JOHN C. WILLIAMSON, DIRECTOR, DEPARTMENT OF GOVERNMENTAL RELATIONS, NATIONAL ASSOCIATION OF REAL ESTATE BOARDS

Mr. WILLIAMSON. I seem to be laboring under some difficulty. I would like to file my statement in its entirety and make reference to certain parts of it.

Senator WILLIAMS. That is agreeable to me. Is it agreeable to you?

Senator HICKENLOOPER. Yes.

Mr. WILLIAMSON. We testified as you know

Senator WILLIAMS. We have some votes that are about to begin on the floor so your most expeditious method of approach will be appreciated.

Mr. WILLIAMSON. We testified against this bill last year and we are here to reiterate the position that we expressed last year.

We certainly share with the sponsors of the bill our concern over the sale of unimproved land in interstate commerce as a result of misrepresentations of material facts. However, the bill is primarily directed at the sight-unseen purchaser and in our opinion this represents a minute fraction of the sales of unimproved land.

We believe that the treatment suggested in the bill was too drastic to penalize all of the sellers of unimproved land with the expense of registering with the Securities and Exchange Commission. We concede that this is an area that does cry for Federal intervention and the chairman knows enough about our association that we don't make such concessions lightly.

We think there are two means of deterring the sale of unimproved land in interstate commerce through material misrepresentation. One is in the bill that was approved last year by the House. I think the chairman also sponsored a bill that would enable the Post Office Department to deny use of the mails upon receipt of evidence that material contains a misrepresentation of fact.

Under existing law, the courts have held that the Post Office Department must prove intent to defraud; and this bill would enable the Post Office Department to deny use of the mails without proving intent. The Post Office Department recommended this bill as one of the means of deterring the fraudulent sale of land. The bill passed the House last year, unfortunately in the waning days of the 89th Congress the Senate didn't act on the bill and we are hopeful that the Congress will enact it during this Congress.

Beginning on page 3, our study of last year's testimony before the subcommittee revealed another alternative which has been incorporated in S. 911 by Senator Bennett

Senator WILLIAMS. Did you have an opportunity to testify in the House on that bill?

Mr. WILLIAMSON. The Post Office bill?

Senator WILLIAMS. Yes.

Mr. WILLIAMSON. My assistant testified last year on the bill. Either testified or filed a statement. But the bill was introduced, as I recall, at our request by Mr. Udall in the House so we were, we did work on the measure.

S. 911 would make it a violation of Federal law to use any means of transportation or communication in interstate commerce, or the mails, to sell or offer to sell lots or land parcels in violation of State laws in effect in the State of residence of the prospective purchaser.

Our convention considered an identical bill that was introduced last year and the delegate body at our last convention endorsed it unanimously at the same time urging the Congress to reject legislation which would require the sellers of land to register with the Securities and Exchange Commission.

While we urge the subcommittee to reject the bill, we would like to discuss certain provisions of the measure in the event the subcommittee decides to report out the bill. We think that certain changes should be made.

Beginning on page 4, section 4 requires that the prospectus be in the hands of the purchaser for at least 48 hours before a binding contract may be executed for the sale of the lot.

No such requirement is imposed in administering the Securities Act of 1933 involving the sale of securities by registrants whose enterprises are generally far more complex and more speculative than the sale of a lot in a subdivision. Under the Securities Act of 1933 the registrant, on the day he files the registration statement, may distribute a preliminary prospectus or "red herring" as it is called in the trade, and thereby start conditioning a prospect for the purchase of securities on the day the registration statement becomes effective.

Senator WILLIAMS. Wait a minute. Let's clarify this. Where there is a new issue of securities there is a time prescribed for the receipt of the prospectus before the purchase can be completed.

Mr. WILLIAMSON. I was not aware there was any timelag in the distribution of the preliminary prospectus because I have

Senator WILLIAMS. I am getting conflicting statements here from my valued counsel.

Mr. WILLIAMSON. Excuse me, I have been counsel on several offerings that went through the Securities and Exchange Commission involving real estate partnerships and we delivered, distributed the preliminary prospectus on the day of filing.

Senator WILLIAMS. Is it not true that until you receive a final prospectus through the mail the sale is not binding and the purchaser can rescind?

Mr. WILLIAMSON. Yes.

Senator WILLIAMS. Does that not usually take 48 hours after the purchase has been agreed upon?

Mr. WILLIAMSON. Yes; but as I was about to say, I wonder how many would-be purchasers of securities whose minds have been made receptive to the issue by reading the "red herring" will examine the amended prospectus before they buy the securities and the amended prospectus might be the result of one or two 10-page letters of comment from the examining branch of the SEC.

The 48-hour waiting period is discriminatory against the real estate industry. If it is a reasonable requirement it would have been im posed on the securities industry many years ago.

Section 6(a) (1) requires that the registrant include in the prospectus the price which he paid for the land. There is no qualification to this requirement. Thus, if the land were acquired 30 years ago in a distressed market, this price must be revealed to the prospective purchaser.

The Securities Act of 1933 imposes no comparable burden on a registrant who is seeking capital to purchase a plant or an apartment house where the real estate was acquired more than 2 years, and in some cases 5 years, preceding the date of filing. The price requirement is unreasonable and has no bearing on the legislative objective. To state the purchase price means that the promoter must include in the prospectus every justification for the difference between his acquisition cost and the price per lot to the public.

Section 7 (c) requires that if there is any change affecting a material factor occurring after the effective date of the registration statement, the subdivision seller promptly file an amendment to the registration statement, which, of course, includes the prospectus.

I must assume that all the items listed under section 6, represent areas of material facts subject to section 7(c). This could prove expensive as well as unduly burdensome to a subdivider.

Securities are often fully subscribed on the effective date and land, particularly parcels of unimproved land where construction is not contemplated in the immediate future may take several years for complete disposition.

Often the developer must change the price and the terms. He might decide to dispose of some of the lots to a builder at a lower price. To require the seller to file an amendment every time there is a change in some material fact is unreasonable. This must have been recognized in the 1933 Securities Act because section 19(a)(3) of that act provides that when a prospectus is used more than 9 months the information contained therein shall be as of a date not more than 16 months prior to such use. A similar cutoff period should be provided

in S. 275.

Section 8(b) prohibits the distribution of a "red herring" by a registrant who is selling land. However, the promoter who is selling ownership in some enterprise, whether it be bowling alleys, mining, manufacturing, or an apartment house, and regardless of how speculative, can use the channels of interstate commerce to condition the minds of the purchaser weeks if not months before the effective date of the registration statement.

If the distribution of a "red herring" results in deceptive practices it should be barred in the administration of the 1933 Securities Act. If it does not, it should be permitted the sellers of lots in subdivisions.

Section 8(b) requires that the prospectus must be used in its entirety in any promotional activity. Unless the subcommittee wants to deny the use of newspapers, radio, or television for subdivision sales, it should approve some provision comparable to section 10(f) which permits a prospectus to be in the form of a radio or television broadcast.

I think when the previous witness testified he said that the registration statement would include the financial statement of the individual if he owns the land or the partnership or the corporation and that this might contain confidential information. The chairman said this is